The GDP growth figure of 4.4 per cent for April-June 2013 has added to the prevailing sense of gloom about the Indian economy. This was the third consecutive quarter when the growth rate fell below 5 per cent. Industrial growth stalled, with mining being the worst hit at minus 2.8 per cent and manufacturing at minus 1.2 per cent. Looking ahead, the forecast appears equally bad. On the basis of seasonally adjusted quarter over quarter growth, private final consumption expenditure fell by 8.2 per cent and investment by a whopping 14.2 per cent. These numbers suggest that however inaccurate the art of economic forecasting may be, it will be difficult for India to see growth above 5 per cent in the year 2013-14. There is little doubt that policy decisions, or rather the lack of them, have hit India’s economy. While markets have seen a slowdown globally, and in India exports on a seasonally adjusted basis have actually picked up a little — by nearly 3 per cent, compared to the previous quarter — the decline, as the finance minister and prime minister have admitted, is largely our own doing.

Recent developments have been good for the rupee and bad for interest rates. Here again, if left to global forces, without our proactive policies of raising interest rates and imposing capital controls, we would have been facing better prospects than we are doing today. Global market developments put pressure on emerging market currencies and the most affected have been those with a large current account deficit, whose currencies depreciated the most. This provided these countries with an adjustment mechanism through which exports would become cheaper and imports more expensive and thereby, over time, the current account deficit would become smaller. It has been argued in recent days that Indian exports and imports have zero price elasticity and thus a depreciation does not help and so must be prevented. Interestingly, the opposite argument was offered when the rupee was appreciating — that it would make Indian exports uncompetitive. Also, the argument for imposing import duties, or giving export subsidies to reduce the CAD, depends on the price elasticity of tradables. After the 1991 crisis, the Indian rupee was devalued by 25 per cent. This helped in reducing the CAD.

Higher interest rates to defend the rupee were supposed to be a temporary measure. Now that growth figures are showing a decline, and the